INSIGHT: Belgium—Law Combating the Improper Withholding Tax Exemption on Investment Income

Belgium adapted some technical provisions to fight against improper withholding tax exemptions and credits on investment income. These changes cover several situations which are listed here and explained according to the category of investor targeted by these changes.

Aside from the changes in law, published on January 22, 2019, the (former) Belgian Minister of Finance also announced operational changes within the organization of the Belgian revenue office.

Description of the Changes

The legislative changes are:

• the beneficiary of income is liable for the withholding tax for all cases of improper exemption or undue reimbursement of withholding tax to the beneficiary of the income;
• a change to Belgian pension funds, making the Belgian withholding tax applicable on foreign dividends received abroad by a Belgian pension fund (save a conditional waiver), with such withholding tax being due by the Belgian pension fund;
• in case of a short-holding period of shares by any pension fund (Belgian or foreign), a new anti-abuse mechanism has been introduced for the Belgian withholding tax on dividends: such a short-holding period implies the reversal of the burden of proof about the authentic character of the transfer, now being assumed to be non-authentic in the event of a transfer for less than 60 days into the pension fund; and
• a “market claim” cannot be qualified as a dividend which gives the right to a tax credit.

These changes are applicable as from the day of publication of the law (January 22, 2019).

Explanation of these Changes by Category of Investor

Please note that the comments below are limited to the changes triggered by the change of the Belgian tax provision as existing in the domestic law, in principle, save any more favorable tax treaty provision.

Foreign (non-Belgian) Pension Fund

In cases where the foreign pension fund holds shares in full property for an uninterrupted period of less than 60 days, any exemption or credit that benefits the pension fund is now deemed not to be “authentic.”

The pension fund will now have to demonstrate that the legal act (or group of legal acts) is justified by other reasons than tax considerations. Such a reversal of the burden of proof is favorable to the Belgian tax authorities. The parliamentary works explicitly mention that this new rule will be taken into consideration for the application of the existing exemptions for U.K. and U.S. pension funds in the respective tax treaties concluded with Belgium.

The parliamentary works also mention that any hedging of position also demonstrates that a short-term holding (less than 60 days) would reveal an improper use of the exemption provided by a tax treaty. Finally, for the Belgian authorities, the enlargement of such anti-abuse provision to any case covered by a tax treaty conforms to the Belgian position regarding the implementation of the OECD’s Multilateral Instrument (“MLI”).

In cases where the foreign pension fund benefits from an improper exemption of withholding tax or from an undue reimbursement of withholding tax, such a beneficiary is now undoubtedly liable for the due withholding tax (previously, the liability was limited to more specific cases).

Belgian Pension Fund

A Belgian pension fund that would hold shares in full property for an uninterrupted period of less than 60 days is now, like a foreign pension fund, deemed to hold these shares in a “non-authentic” way, i.e. only for tax considerations. Then, as improper holding, any exemption or credit usually applicable would be denied, unless the pension fund demonstrates the authentic character of the underlying motives.

A Belgian pension fund perceives dividends now with a similar tax treatment, irrespective of the means and origin of the received dividends. Previously, foreign source dividends received without any Belgian intermediary were received without any Belgian withholding tax (contrary to Belgian source dividends or foreign dividends received through a Belgian intermediary, subject to potential exemption when conditions were met, and generating a tax credit for pension fund subject to the ordinary corporate tax regime or the tax regime for the legal entities). Now, the pension fund is liable for (and has to pay) the withholding tax on foreign source dividends received without any Belgian intermediary.

Where a “non-authentic” holding set up to obtain, as the main target or as one of the main targets, the tax credit attached to the withholding tax on dividends, the law now explicitly states that the Belgian pension fund cannot benefit from the tax credit.

The application of the tax credit was discussed in the case of transferring shares just before the payment of dividends when made too late pursuant to the standard rules applicable to the settlement of securities transactions, opening a market claim from the buyer on the seller that is still identified as the dividends’ beneficial owner. The law now explicitly denies any tax credit on a market claim: obtaining a tax credit requires that the Belgian pension fund be identified as the beneficial owner for the dividends. As a result, the timing of the acquisition of shares has to be anticipated (within one day under the standard settlement rules) in case of a contemplated acquisition just before a dividend distribution.

Where the Belgian pension fund benefits from an improper exemption of withholding tax or from an undue reimbursement of withholding tax, such beneficiary is now undoubtedly liable for the due withholding tax (previously, as for the foreign pension funds, the liability was limited to more specific cases).

Foreign Investor (Other than Pension Fund)

Where the foreign investor benefits from an improper exemption of withholding tax or from an undue reimbursement of withholding tax, such a beneficiary is now undoubtedly liable for the due withholding tax.

Belgian Investor (Other than Pension fund)

In the same way as for Belgian pension funds, any other professional investor that would obtain a market claim for dividends from acquired shares for which the buyer was not identified as the beneficial owner has no tax credit against any withholding tax on these dividends.

In cases where the Belgian investor benefits from an improper exemption of withholding tax or from an undue reimbursement of withholding tax, such a beneficiary is now undoubtedly liable for the due withholding tax.

Planning Points

The Belgian tax authorities expect a significant additional amount of withholding tax resulting from these changes.

This shows the practical importance of these changes, that are of a technical nature, requiring taxpayers to be attentive to the level of compliance, demanding accurate documentation and an adherence to the proper timeline.

Laurent Donnay de Casteau is Partner and Head of Tax (Belgium) at Osborne Clarke